The UK economy has officially fallen into contraction as the cost of war with Iran spirals beyond government forecasts, according to internal Treasury documents obtained by this bureau. Gross domestic product shrank by 0.3% in the first quarter, sources confirm, driven by a collapse in business investment and a spike in energy prices linked to the disruption of Gulf shipping lanes.
The Treasury is now modelling a recession that could last through 2026, with the Chancellor preparing an emergency budget to plug a £12bn hole in public finances. Military spending has surged 40% since the conflict began, while consumer confidence has plunged to levels not seen since the 2008 crash. Key manufacturing sectors, including aerospace and chemicals, have reported supply chain chaos as sanctions on Iranian-linked entities backfire, hitting British exporters.
The Bank of England is expected to be forced to hold interest rates higher for longer, deepening the economic pain. A Treasury insider told us: “We are in uncharted territory. The war is bleeding the economy dry.
” The National Institute of Economic and Social Research now forecasts unemployment will hit 7% by year end. Meanwhile, the cost of insuring commercial vessels transiting the Strait of Hormuz has quintupled, pushing up import costs for everything from oil to electronics. The pound has fallen 8% against the dollar since hostilities began.
This is not a soft landing. This is a hard crash, and there is no bailout coming. The government's own projections show debt will exceed 110% of GDP within two years.
Every day the conflict continues, the bill grows. The Treasury has begun drawing up contingency plans for capital controls and a potential IMF bailout, though officials insist this is a worst-case scenario. The question now is not if the economy can withstand the war, but what will be left once it ends.
